Page 443 - SAIT Compendium 2016 Volume2

IN 44 (2) Income Tax acT: InTeRPReTaTIon noTes IN 44 (2)
Base cost = valuation date value + post-valuation date costs = R75 000+ R7 000
= R82 000
Capital gain = Proceeds – base cost
= R110 000 – R82 000 = R28 000
Note:
1. The TAB Calculator for PBOs and Recreational Clubs on the SARS website can be used to determine the time- apportionment base cost for a PBO. The standard ‘TAB Calculator’ should not be used for this purpose because it assumes a valuation date of 1 October 2001 and will give an incorrect result.
2. This example assumes that no improvements were made on or after the valuation date. Had such improvements been made, the proceeds formula in paragraph 30(2) would have had to be applied to determine ‘P’.
20% of proceeds method
Valuation date value = 20% × (proceeds less post-valuation date expenditure)
= 20% × (R110 000 – R7 000)
= 20% × R103 000
= R20 600
Base cost = valuation date value + post-valuation date expenditure = R20 600 + R7 000
= R27 600
Capital gain = Proceeds – base cost
= R110 000 – R27 600
= R82 400
Market value method (valuation done on or before 31 March 2008)
Base cost = Market value on 1 April 2006 + post-valuation date expenditure = R80 000 + R7 000 = R87 000
Capital gain = Proceeds – base cost = R110 000 – R87 000
= R23 000
Example 8 – Determining ‘substantially the whole of the use’ of the asset on area usage [paragraph 63A(b)] Facts:
An approved PBO provides counselling services to prisoners from a residential house which it owns. The PBO uses only a portion of the house for counselling services and lets the remaining rooms to third parties at a market-related rental. The area of the house is 210 sq metres. The area of the property which is let is 30 sq metres and the balance of 180 sq metres is used for PBAs. The nancial year of the PBO ends on 28 February. The property was valued on 1 March 2007 and sold on 30 June 2011 realising a capital gain.
Result:
As from its rst year of assessment commencing on or after 1 April 2006, the PBO is subject to paragraph 63A in determining whether any portion of a capital gain or capital loss on disposal of its assets must be disregarded. For the paragraph to apply it is necessary to determine whether the property was substantially used on or after the valuation date to conduct PBAs. On the facts it is appropriate to have regard to the area which was used for PBAs in relation to the whole property, namely, 180 / 210 × 100 = 85.7%. The capital gain made on the sale of the property must be disregarded since substantially the whole of the use of the property, more than 85%, was directed at carrying on PBAs.
Example 9 – Determination of ‘substantially the whole of the use’ on an hourly usage basis [paragraph 63A(b)] Facts:
An educational institution that has been approved under section 30 has acquired a separate property for the purposes of developing sports grounds. Hockey elds and tennis courts were subsequently constructed on the property. During school holidays and over periods when the facilities were not used by the PBO, they were let to outside sports clubs, coaches and other third parties at market-related rates on which the PBO was partially taxed with effect from the commencement of its nancial year ending 31 December 2007. The PBO was obliged to dispose of the property on 8 March 2013 as a result of a commercial development on the adjoining properties and a capital gain was made on the transaction. Hourly usage of the property by third parties was 12%, with PBA usage being 88%.
Result:
The PBO has used substantially the whole of the property from the valuation date in carrying out its PBAs. The capital gain on the disposal of the property must accordingly be disregarded under paragraph 63A(b)(i).
7. Donations or bequests to PBOs [paragraphs 40(1)(b) and 62(b)]
Any capital gain or capital loss determined on an asset donated or bequeathed to a PBO which has been approved by the Commissioner under section 30(3) must be disregarded in the hands of the donor.
8. Transfer duty
Transfer duty will become payable on a property which quali ed for an exemption from transfer duty if the whole of the property or substantially the whole of that property is used for purposes other than the carrying on of any PBA. The transfer duty becomes payable at the time the property is used for any purpose other than for the purpose of carrying
saIT comPendIum oF Tax LegIsLaTIon VoLume 2 435